Wary Corporation is considering the purchase of a machine that would cost $240,000 and would last for 5 years. At the end of 5 years, the machine would have a salvage value of $29,000. The machine would reduce labor and other costs by $63,000 per year. The company requires a minimum pretax return of 10% on all investment projects. (Ignore income taxes.)Refer to Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using the tables provided.Required:Determine the net present value of the project.
What will be an ideal response?
| Year | |||||||||
| Now | 1-5 | 5 | |||||||
| Initial investment | $ | (240,000 | ) | ||||||
| Annual net cash flow | $ | 63,000 | |||||||
| Salvage value | $ | 29,000 | |||||||
| Total cash flows (a) | $ | (240,000 | ) | $ | 63,000 | $ | 29,000 | ||
| Discount factor (10%) (b) | 1.000 | 3.791 | 0.621 | ||||||
| Present value of cash flows (a) × (b) | $ | (240,000 | ) | $ | 238,833 | $ | 18,009 | ||
| Net present value | $ | 16,842 | |||||||
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